Social Security Reform and Intergenerational Redistribution in Germany

This paper calculates intergenerational distribution effects of a reform of the German public old age social security program (äGesetzliche Rentenversicherung''). The paper first presents the key features of the public pension system and describes the effects of holding the contribution rate constant on the replacement rate. This rate may be a misleading measure of intergenerational distribution since it does not take into account the contribution burden for the different cohorts. Therefore, I determine the losses and gains due to the contribution freeze in terms of expected present values for cohorts born between 1930 and 1980. I express the distributional effects in terms of (i) expected present discounted values and (ii) internal rates of return of the retirement system. The paper shows that a contribution rate freeze makes cohorts born after 1960 better off in the base case (1 macro growth and 3 interest). These cohorts can offset the reduction in public pension-replacement ratios through private saving. Higher interest rates (i) positively shift the break even cohort, and (ii) reduce the losses also for older cohorts. Higher economic growth (i) adversely shifts the break even birth year, (ii) only slightly improves the internal rates of return of the pension system, and (iii) considerably increases the absolute level of real pensions. If holding contribution rates constant increases economic growth by 1 percentage point relative to the no-reform case (i.e. through exercising smaller disincentive effects), the level of pensions would be equal in both scenarios. This means that pension reform is not a zero sum game of redistributing income between different cohorts but also an issue of trading equity against efficiency.